Rajasthan Urban Sector Development Program (RRP IND 42267)

FINANCIAL MANAGEMENT ASSESSMENT REPORT

A. Executive Summary

1. This Financial Management Assessment (FMA) has been prepared in accordance

with Asian Development Bank (ADB) Guidelines for the Financial Management and
Analysis of Projects (2005) and Financial Due Diligence a Methodology Note (2009) and
focuses on fund flows, staffing, accounting policies and procedures, internal controls,
financial reporting and monitoring, and internal and external audit. The FMA considered the
following:

a. Local Self Government Department (LSGD) (EA) and Rajasthan Urban

Infrastructure Development Project (RUIDP) (IA) and
b. State level as there is a program loan component.

2. A key aspect of the FMA is evaluating the risks associated with project financial
management arrangements. ADB s principal concern is to ensure that project funds are
used economically and efficiently for the purpose intended. In support of this, it seeks
assurance that the EA and IA financial management systems can report on the source
and use of project funds. This assessment is based on the results of a FMA
questionnaire, discussions with officials of GOR, RUIDP, six municipal bodies (also
referred to as urban local bodies (ULBs)) and information available through various
reports, including state budgets, LSGD Annual Report (2013), RUIDP Annual Report
(2013), and Local Fund Audit Department and Comptroller and Audit General (CAG) Audit
Reports.

3. This FMA was conducted to (a) assess EA capacity to monitor, manage and support
the overall program, (b) assess IA capacity to implement and manage investments and (c)
propose ways and means to strengthen the capacity of EA and IA. Specifically, the
objective is to enhance competence levels to achieve the governmen goals of institutional
development and urban governance improvement. The assessment, along with the forecast,
outlines the financial environment of the IA and the financial risks that may affect the project
impact and sustainability.

B. Risk Assessment:

a. Inherent Risk: Assessed overall as moderate. Political will may destabilize the
willingness to increase taxes and tariffs in the coming years, and possibly affect
their development and financial situation. Close monitoring and resolving specific
capacity gaps with technical support and incentives for governance
improvements will be required.

b. Control Risk: Assessed overall as moderate. RUI

practices and procedures are considered to be adequate for management and
control of project finances. The project funds will be managed and audited
separately from other funds. However, lack of internal audit mechanism in RUIDP
is an area of concern.

4. Strengths and Weaknesses. The main strength of the existing project financial
management (FM) is that RUIDP has significant experience over the last thirteen years in
financial management of ADB-funded projects. Although this has mitigated risk at the project
2

level, this experience has not always translated into effective financial management for the
organization. The main weaknesses include the number of pending audit paras at the State
level and RUIDP level and lack of internal audit in RUIDP till date.

C. Project Description

5. The proposed Rajasthan Urban Sector Development Program (SDP) will complement
the past and ongoing efforts of the government of Rajasthan (GOR) to improve water supply
and wastewater services to the residents of the state of Rajasthan. The SDP comprises (i) a
program, financed by a policy-based loan, to support policy reforms, including institutional
development and governance improvement in the urban sector in the state, and (ii) a project,
financed by a project loan, to invest in water distribution network and sewerage systems in the
six project cities in the state. Project envisages focused investments of US$250 million in water
supply and wastewater in six cities with population of more than 100,000 each (Census 2011):
Sri Ganganagar, Hanumangarh, Jhunjhunu, Pali, Bhilwara and Tonk. Detailed Project Reports
(DPRs) of all the six identified towns will be prepared under this project. The distribution network
improvement works are being implemented with the objective of nonrevenue water reduction on
district metering area approach to improve efficiency and maximize the impact of investments.
In wastewater sector, the focus is on the sewerage network and wastewater treatment with
energy generation from sludge and recycling of wastewater. The program loan of $250 million
will have policy reforms conditions based on which the funds will be released in two tranches.

D. Country Issues

6. The identification of country-level issues is based on the Diagnostic Studies of

Accounting and Auditing, the World Bank Country Financial Accountability Assessments,
Reports on the Observance of Standards and Codes and others. The country issues that
potentially impact project financial management include a weak public financial management
(PFM) environment and management and skills capacity issues.

7. Public financial management environment. The country policy and institutional

assessment for transparency, accountability, and corruption in the public sector rating (1=low to
6=high) in India was last reported at 3.6 in 2012 (World Bank 2012). 1 Transparency,
accountability, and corruption in the public sector assess the extent to which the executive can
be held accountable for his use of funds and for the results of his actions by the electorate, the
legislature, and the judiciary, and the extent to which public employees within the executive are
required to account for administrative decisions, use of resources, and results obtained. The
three main dimensions assessed here are (i) accountability of the executive to oversight
institutions, (ii) accountability of public employees for their performance, and (iii) access of civil
society to information on public affairs and state capture by narrow vested interests.

8. Main findings of the

are:
a. Assessment of Impact of PFM Weakness. When judged from the perspective
of the three main objectives of an effective public financial management
system namely, aggregate fiscal discipline, strategic allocation and the efficient
delivery of services many problems exist in India. While efforts of the
government and the role of legal and institutional mechanisms in strengthening

1
Available at http://data.worldbank.org/indicator/IQ.CPA.PUBS.XQ.